Don't Fall in Love...
My wife and I have three little ones who often make exaggerated claims of how much "I love ice cream," "I love Teenage Mutant Ninja Turtles," "I love that song"... and on the list goes. As adults we also can pledge our love to many things we experience and aspire to. However, there are only a few things in life we should truly, deeply love. I believe we all agree our spouse, kids and family belong here. When my wife recently asked my 4 year old son what his favorite Christmas gift was, his reply was impressive... "the love my mommy gives me." WOW-- you should have seen my wife light up with pure joy. As I laughed in disbelief, I bent over to him and said that is sweet... but you really should have saved that one for when you are in big trouble. He just smirked.
Over the past few months I have shared some of the basics of financial planning; budgeting, emergency funds, life insurance, and getting organized (if you have missed them go to my blog HERE). I want to focus this discussion on the "wheel-house" of everyone's financial plan- your investments. Let me explain.
Don't fall in love...with your investments.
Investments are the vehicle or the "means to an end" to help accomplish your financial goals. Your goals should drive your investments, don't allow your investments to drive your goals. I often hear people share their "love" of a particular investment or display common concerning behaviors we all can struggle with in terms of our money. For most people, one of the strongest emotional responses in life involves money. Let me share some common scenarios as a professional I observe, using the world of "behavioral finance."
The most common behavior is "Overconfidence." This is a common problem that is difficult for an individual to realize in themselves, as they believe they are better than average or most people in investing- although others usually see this overestimation. Overconfidence most often leads to frequent portfolio changes and increasing risk taking while at the same time underestimating the risks associated...this ends up being costly. Infatuation of an investment or the fixation of perfectly timing markets repeatedly is an "Allure" -see below.
Source Morningstar Advisor, Feb 2013 *See footnotes.
Another common behavior is "Herding." We are social animals and like to roam in packs, following the consensus view. Watch out! The problem is how often when everyone seems to say something is going to happen, it seldom does. For example, in 1999 you may have heard "Tech stocks would never stop climbing" or in 2006 many said "housing prices would continue to go higher," right...? Or how about you are at a gathering and someone shares how they have the investment that will change your life, it's the "hot-stock-tip." Investment success stories and tips are usually very misleading. Be careful what bandwagon of social influence you jump on.
"Risk Aversion/Loss Aversion" has become extremely typical since "the great recession of 2008." Everyone felt that pain and some unfortunately still are. Aversion refers to the tendency for people to strongly prefer avoiding losses over earning gains. Studies have shown repeatedly that people find losses twice to two-and-a-half times as painful as gains are pleasurable. Emotional pain associated with a loss can paralyze investors to hold on to loser investments without solid fundamentals to do so (irrational "love" at times), not invest appropriately and often sadly avoid investing all together.
There are many more behavior finance symptoms we could discuss but here is the message. Don't fall in love with your investments, thus letting your emotions get in the way of your financial plan. One of the greatest pleasures of my passion as an advisor is encouraging my clients to dream big, identify goals and then develop a plan to help achieve them. Your carefully selected, planned and refined financial goals are what are important. I have heard it said,
"good investing should be about as exciting as watching the grass grow."
Here are three reasons why most people shouldn't manage their own money- the risks are too high:
Emotional attachment. As I shared prior, it is near impossible to detach the emotion of your hard-earned money from wise investment decisions. Heck, I'm an expert on this and I still sometimes seek good counsel for my investments. Don't love your investments.
Time. Investing with the wall street gang is not a part time hobby. Our world is increasingly inter-related in terms of macroeconomics,politics, global issues, etc. I also believe we are ever more "niche focused" in our expertise's. Your time is almost always best spent in terms of profitability and efficiency doing what you do best, your niche skill set.
Enjoyment. In order to do anything well you have to like what you are doing (preferably passionate about it) and desire to do it. I have found few people who really enjoy handling their investments by themselves. Over time I educate and help clients become more comfortable; but the reality is most will never name at top of their list of fun activities-- the desire to research and reallocate their investments.
Seek out a trustworthy, qualified and board certified investment professional to assist you. Most of us would never dream of repairing major engine work on our car or performing eye surgery ourselves right? Why then would you risk your kid's college, ability to retire and overall financial future? The best financial strategies are collaborative, interactive planning with someone you trust.
Let me know if I can be of assistance to your family.
Luke Fields, CFP®
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Theinformation has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Luke Fields and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Past performance may not be indicative of future results. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
*Exhibit 1 This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Indexes used: Stocks- The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. Bonds- U.S. Government Bonds and Treasury Bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. 60/40 Portfolio- Mix of S&P 500 and U.S Government Bonds and Treasury Bills.
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